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If the next Xbox and PlayStation block used games, the whole industry will be shaken to its core

As both Microsoft and Sony prepare to unveil their next major video game consoles, there has been a lot of rumors about what they’ll offer both in terms of hardware specifications and software functionality.

One of the most contentious rumors is that at least one of these systems will require an Internet connection to unlock a serial number shipped with every game. The idea is that the code only has a single activation, effectively locking it to your console and making it all but useless on any other system.

Many gamers are opposed to this. Physical media, by and large, has always allowed consumers to play it on any number of devices. Imagine only being able to play a film on one DVD player, or a record on a single Hi Fi system. It’s a restrictive concept that violently blocks the social aspect of sharing and enjoying good content.

Video games are a little different though. New releases are sold at a much higher price to their film and audio counterparts, and hold greater economic value as a result. The industry is also setup so that studios have to bet large when it comes to high-end, blockbuster experiences. This means very high development costs, longer production times and expensive marketing campaigns. The gamble is that this is then recouped by selling a large number of copies at full-price, thereby funding the next instalment.

That’s not happening at the moment though. Piracy has always been an issue with video games, but never to quite the same extent associated with films and music. Instead, two underlying consumer trends are hurting sales of new releases; sharing and pre-owned copies.

The first touches again on the social aspect of video games. If you’ve played a great title and experienced all of the available content, it’s natural to want to share that experience with others. I remember in the playground swapping my copy of Tales of Symphonia with a fellow GameCube enthusiast who had just finished The Legend of Zelda: The Wind Waker. It was a cherished moment, where we both respected each other’s taste in games and also knew that we were saving a lot of money in the process.

If a player doesn’t have anyone to share a game with, the second option is to go back to the store and trade it for some in-store credit. Pre-owned games, just like independent record stores, have thrived on the sales associated with used copies. Players appreciate the idea too, as it gives them a chance to try out a game they may not have otherwise bought based on its initial price tag.

But of course, all of this hurts the studios trying to sell large amounts of new, blockbuster video games. It’s also detrimental to the hardware manufacturers, who take a cut out of software sales associated with their platform. For that reason, and that reason alone, Microsoft and Sony could be looking at blocking second-hand games on their systems.

But if such a system is implemented, it’s going to affect the industry in new and profound ways.

Retail stores

The actual act of buying a game from a consumer, and then selling it to another person in-store is only part of the equation. The real incentive is that the transaction drives more people into their store.

You take a look around, and perhaps buy a new, full-price game based on the credit you’ve just earned. When you approach the register, the shop assistant will ask if you’re interested in pre-ordering the next instalment while you’re there. Simply being inside the store presents staff with a wealth of potential sales opportunities, which is important for their bottom line revenue.

Killing pre-owned games will hurt physical stores in a big way. Consumers will increasingly buy new games and pre-order upcoming titles online, saving a visit to the local store only when they happen to be out and about. Why spend time going to the store if you can get the same offer – or a cheaper offer – on the Internet?

Some reputable names, such as Game in the UK, are already struggling to make ends meet on the high street. If they disappear, that will hurt hardware manufacturers and studios in the long run, as they rely on physical stores to promote and sell new releases. Nobody wins.

Digital distribution

Video games are still selling relatively well as a physical-format media. Digital distribution models are undoubtedly becoming more popular – the rise of Steam, Xbox Live Arcade and PlayStation Network are testament to this – but we haven’t seen the scales tip just yet.

Compare this to music, where physical singles are all but extinct and album sales are starting to wane. iTunes has long been seen as the saving grace, although new streaming services such as Spotify, Rdio and Xbox Music have shown that there other methods of supplying listeners with digital music files.

Almost inherently, digital distribution stops pre-owned sales. Players pay for a game once at an infinite number of price points and sit back as its downloaded to the hard drive on their PC or video game console. Nine times out of ten it’s then locked to that system, with very little opportunity to share it with another person.

Consumers have accepted this as a part of digital ownership, in part because that’s the way it always has been. The difference with physical copies is that they were once unlocked – that notion is now embedded in the public consciousness, and changing that simply seems like a step backwards in the eyes of the consumer.

Blocking pre-owned games will accelerate the adoption of digital distribution services. If it’s possible to download a title through the Internet at midnight, why wait until the morning to visit your local store? The physical space in our homes is becoming a precious commodity, and if you’re not interested in building a collection, why waste the space on your shelf or bookcase?

Nintendo Wii

If Microsoft and Sony really do adopt this idea of an activation code tied to every game, one company in particular stands to benefit from it. Nintendo.

The Wii U is by no means a failure, but it hasn’t created quite the same excitement and hype that the original Wii did. A lack of software at launch, combined with a new control scheme that is difficult to market to the casual consumer has left them in a bit of a slump.

The ability to buy pre-owned games and share them with friends and family seems like an important part of Nintendo. If they can capitalize on this throughout the year, and push it as a differentiator between themselves, Sony and Microsoft, the house of Mario could attract new players to the system.

Of course, it’s possible for Nintendo to add similar functionality in the Wii U as part of a firmware update, but nothing so far has suggested that the company is considering it.

Either way, the bottom line is that if Sony and Microsoft proceed to try to block used titles on their next systems, it will shake the video game industry to its core.

Nick Summers is a technology journalist for The Next Web. He writes on all sorts of topics, although he has a passion for gadgets, apps and video games in particular. You can reach him on Twitter, circle him on Google+ and connect with him on LinkedIn.